Company Quick10K Filing
Hamilton Beach Brands Holding
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 14 $240
10-Q 2019-11-07 Quarter: 2019-09-30
10-Q 2019-07-31 Quarter: 2019-06-30
10-Q 2019-04-25 Quarter: 2019-03-31
10-K 2019-03-06 Annual: 2018-12-31
10-Q 2018-10-30 Quarter: 2018-09-30
10-Q 2018-08-01 Quarter: 2018-08-01
10-Q 2018-05-02 Quarter: 2018-05-02
10-K 2018-03-07 Annual: 2017-12-31
10-Q 2017-11-01 Quarter: 2017-09-30
8-K 2019-11-06 Earnings, Regulation FD, Exhibits
8-K 2019-11-06 Earnings, Exhibits
8-K 2019-10-25 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-10-15
8-K 2019-07-31 Earnings, Exhibits
8-K 2019-07-31 Earnings, Regulation FD, Exhibits
8-K 2019-05-09 Shareholder Vote
8-K 2019-04-25 Earnings, Regulation FD, Exhibits
8-K 2019-04-25 Earnings, Exhibits
8-K 2019-03-21 Earnings, Regulation FD, Exhibits
8-K 2019-03-06 Earnings, Regulation FD, Exhibits
8-K 2019-03-06 Earnings, Exhibits
8-K 2018-12-28 Enter Agreement, Officers, Exhibits
8-K 2018-10-30 Earnings, Regulation FD, Exhibits
8-K 2018-10-30 Earnings, Exhibits
8-K 2018-10-16 Officers, Exhibits
8-K 2018-08-16 Officers, Exhibits
8-K 2018-08-01 Earnings, Exhibits
8-K 2018-08-01 Earnings, Regulation FD, Exhibits
8-K 2018-05-18 Shareholder Vote
8-K 2018-05-02 Earnings, Exhibits
8-K 2018-05-02 Earnings, Regulation FD, Exhibits
8-K 2018-04-16 Earnings, Regulation FD, Exhibits
8-K 2018-03-26 Earnings, Regulation FD, Exhibits
8-K 2018-03-07 Earnings, Regulation FD, Exhibits
8-K 2018-03-07 Earnings, Exhibits
HBB 2019-09-30
Part I
Item 1. Financial Statements
Note 1-Basis of Presentation
Note 2-Recently Issued Accounting Standards
Note 3-Transfer of Financial Assets
Note 4-Inventory
Note 5-Fair Value Disclosure
Note 6- Stockholders' Equity
Note 7-Revenue
Note 8-Contingencies
Note 9-Business Segments
Note 10-Income Taxes
Note 11-Subsequent Events
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1 Legal Proceedings
Item 1A Risk Factors
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Mine Safety Disclosures
Item 5 Other Information
Item 6 Exhibits
EX-10.1 exhibit101forbearanceagree.htm
EX-31.1 exhibit3119302019.htm
EX-31.2 exhibit3129302019.htm
EX-32 exhibit329302019.htm

Hamilton Beach Brands Holding Earnings 2019-09-30

HBB 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
TCS 349 1,122 860 909 529 24 88 610 58% 6.9 2%
HOFT 248 401 133 660 134 30 47 267 20% 5.6 8%
HBB 240 306 247 732 181 5 20 239 25% 12.2 2%
TTS 201 417 279 349 245 3 39 259 70% 6.6 1%
BSET 149 281 93 459 276 6 20 137 60% 6.9 2%
FLXS 134 254 49 444 70 -33 -31 112 16% -3.6 -13%
PRPL 59 100 103 336 132 -3 4 72 39% 17.9 -3%
NVFY 22 81 6 57 10 2 2 18 17% 9.1 3%
DXYN 10 264 214 389 83 -25 -5 131 21% -24.5 -9%
ARCI 7 33 15 33 9 -6 -2 6 26% -2.8 -18%

10-Q 1 hbbhc9301910-q.htm 10-Q Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _______________________________________________________________________________________________________________________________________________________________________________________________________
FORM 10-Q
(Mark One)
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended September 30, 2019
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from                      to                     
Commission File Number: 001-38214
 
HAMILTON BEACH BRANDS HOLDING COMPANY
 
 
 
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
 
 
DELAWARE 
 
31-1236686
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
4421 WATERFRONT DR.
GLEN ALLEN, VA
 
23060
 
 
(Address of principal executive offices)
 
(Zip code)
 
 
 
 
 
 
 
 
(804) 273-9777
 
 
 
 
(Registrant's telephone number, including area code)
 
 
 
 
 
 
 
 
 
N/A
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Class A Common Stock, Par Value $0.01 Per Share
 
HBB
 
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.             YES þ NO o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                             YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer þ
 
Non-accelerated filer o
 
Smaller reporting company þ
 
Emerging growth company þ

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO þ

Number of shares of Class A Common Stock outstanding at November 1, 2019: 9,147,309
Number of shares of Class B Common Stock outstanding at November 1, 2019: 4,369,489
 
 
 
 
 



HAMILTON BEACH BRANDS HOLDING COMPANY
TABLE OF CONTENTS
 
 
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


Part I
FINANCIAL INFORMATION
Item 1. Financial Statements

HAMILTON BEACH BRANDS HOLDING COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
SEPTEMBER 30
2019
 
DECEMBER 31
2018
 
SEPTEMBER 30
2018
 
(In thousands)
Assets
 

 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
1,866

 
$
6,352

 
$
2,139

Trade receivables, net
106,135

 
102,592

 
113,683

Inventory
181,847

 
144,691

 
183,831

Prepaid expenses and other current assets
22,445

 
24,514

 
20,766

Total current assets
312,293

 
278,149

 
320,419

Property, plant and equipment, net
22,653

 
22,630

 
23,309

Goodwill
6,253

 
6,253

 
6,253

Other intangible assets, net
3,483

 
4,519

 
4,864

Deferred income taxes
6,161

 
8,163

 
10,450

Deferred costs
8,925

 
8,012

 
10,306

Other non-current assets
1,561

 
2,701

 
3,322

Total assets
$
361,329

 
$
330,427

 
$
378,923

Liabilities and stockholders' equity
 

 
 

 
 
Current liabilities
 
 
 
 
 
Accounts payable
$
147,206

 
$
132,968

 
$
143,955

Accounts payable to NACCO Industries, Inc.
220

 
2,419

 
2,480

Revolving credit agreements
59,702

 
11,624

 
69,883

Accrued compensation
15,568

 
17,023

 
16,575

Accrued product returns
8,266

 
10,941

 
9,601

Accrued cooperative advertising
9,940

 
10,314

 
8,950

Other current liabilities
20,711

 
21,612

 
18,189

Total current liabilities
261,613


206,901

 
269,633

Revolving credit agreements
30,000

 
35,000

 
30,000

Other long-term liabilities
14,961

 
23,088

 
24,840

Total liabilities
306,574

 
264,989

 
324,473

Stockholders' equity
 

 
 

 
 
Class A Common stock
95

 
93

 
92

Class B Common stock
44

 
44

 
45

Capital in excess of par value
54,143

 
51,714

 
51,366

Treasury stock
(5,960
)
 

 

Retained earnings
24,955

 
30,897

 
17,031

Accumulated other comprehensive loss
(18,522
)
 
(17,310
)
 
(14,084
)
Total stockholders' equity
54,755

 
65,438

 
54,450

Total liabilities and stockholders' equity
$
361,329

 
$
330,427

 
$
378,923

See notes to unaudited condensed consolidated financial statements.

2


HAMILTON BEACH BRANDS HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
THREE MONTHS ENDED SEPTEMBER 30
 
NINE MONTHS ENDED SEPTEMBER 30
 
2019
 
2018
 
2019
 
2018
 
(In thousands, except per share data)
 
(In thousands, except per share data)
Revenue
$
169,778

 
$
196,901

 
$
463,582

 
$
501,475

Cost of sales
129,194

 
146,550

 
352,618

 
372,478

Gross profit
40,584

 
50,351

 
110,964

 
128,997

Selling, general and administrative expenses
36,182

 
39,211

 
108,306

 
117,328

Amortization of intangible assets
345


345

 
1,036

 
1,036

Operating profit
4,057

 
10,795

 
1,622

 
10,633

Interest expense, net
864

 
1,001

 
2,514

 
2,422

Other expense (income), net
688


(426
)
 
230

 
(253
)
Income (loss) before income taxes
2,505

 
10,220

 
(1,122
)
 
8,464

Income tax expense
2,108

 
2,176

 
1,186

 
1,712

Net income (loss)
$
397

 
$
8,044

 
$
(2,308
)
 
$
6,752

 
 

 
 

 
 
 
 
Basic and diluted income (loss) per share
$
0.03


$
0.59

 
$
(0.17
)
 
$
0.49

 



 
 
 
 
 
Basic weighted average shares outstanding
13,579


13,704

 
13,726

 
13,694

 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding
13,595

 
13,713

 
13,726

 
13,697


See notes to unaudited condensed consolidated financial statements.

3


HAMILTON BEACH BRANDS HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
THREE MONTHS ENDED SEPTEMBER 30
 
NINE MONTHS ENDED SEPTEMBER 30
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
 
(In thousands)
Net income (loss)
$
397

 
$
8,044

 
$
(2,308
)
 
$
6,752

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(312
)
 
1,257

 
244

 
1,282

Loss on long-term intra-entity foreign currency transactions
(509
)
 
(53
)
 
(373
)
 
(1,066
)
Cash flow hedging activity
(127
)
 
(301
)
 
(1,570
)
 
452

Reclassification of hedging activities into earnings
122

 
(102
)
 
268

 
105

Reclassification of pension adjustments into earnings
127

 
115

 
219

 
415

Total other comprehensive income (loss), net of tax
(699
)
 
916

 
(1,212
)
 
1,188

Comprehensive income (loss)
$
(302
)
 
$
8,960

 
$
(3,520
)
 
$
7,940


See notes to unaudited condensed consolidated financial statements.


4



HAMILTON BEACH BRANDS HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
NINE MONTHS ENDED
SEPTEMBER 30
 
2019
 
2018
 
(In thousands)
Operating activities
 
 
 
Net income (loss)
$
(2,308
)
 
$
6,752

Adjustments to reconcile net income (loss) to net cash used for operating activities:
 
 
 
Depreciation and amortization
3,279

 
3,775

Deferred income taxes
2,969

 
1,900

Share-based compensation expense
2,430

 
3,270

Impairment of property, plant and equipment
975

 
244

Other
142

 
(3,064
)
Net changes in operating assets and liabilities:
 
 
 
Affiliate payable
(2,199
)
 
(6,709
)
Trade receivables
(4,897
)
 
(4,992
)
Inventory
(37,641
)
 
(49,087
)
Other assets
(231
)
 
(6,524
)
Accounts payable
14,927

 
943

Other liabilities
(12,577
)
 
6,912

Net cash used for operating activities
(35,131
)
 
(46,580
)
Investing activities
 
 
 
Expenditures for property, plant and equipment
(3,305
)
 
(7,240
)
Other
37

 
7

Net cash used for investing activities
(3,268
)
 
(7,233
)
Financing activities
 
 
 
Net additions to revolving credit agreements
43,074

 
48,538

Cash dividends paid
(3,634
)
 
(3,492
)
Purchase of treasury stock
(5,960
)
 

Net cash provided by financing activities
33,480

 
45,046

Effect of exchange rate changes on cash
433

 

Cash and cash equivalents
 
 
 
Decrease for the period
(4,486
)
 
(8,767
)
Balance at the beginning of the period
6,352

 
10,906

Balance at the end of the period
$
1,866

 
$
2,139


See notes to unaudited condensed consolidated financial statements.

5


HAMILTON BEACH BRANDS HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
 
Class A common stock
Class B common stock
Capital in excess of par value
Treasury stock
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders' equity
 
(In thousands)
Balance, January 1, 2019
$
93

$
44

$
51,714

$

$
30,897

 
$
(17,310
)
$
65,438

Net loss




(1,761
)
 

(1,761
)
Issuance of common stock, net of conversions
2


(1
)


 

1

Share-based compensation expense


807



 

807

Cash dividends, $0.085 per share




(1,177
)
 

(1,177
)
Other comprehensive loss





 
(221
)
(221
)
Reclassification adjustment to net loss





 
(8
)
(8
)
Balance, March 31, 2019
$
95

$
44

$
52,520

$

$
27,959

 
$
(17,539
)
$
63,079

Net loss




(944
)
 

(944
)
Purchase of treasury stock



(2,334
)

 

(2,334
)
Share-based compensation expense


822



 

822

Cash dividends, $0.09 per share




(1,242
)
 

(1,242
)
Other comprehensive loss





 
(530
)
(530
)
Reclassification adjustment to net loss





 
246

246

Balance, June 30, 2019
$
95

$
44

$
53,342

$
(2,334
)
$
25,773

 
$
(17,823
)
$
59,097

Net income




397

 

397

Purchase of treasury stock



(3,626
)

 

(3,626
)
Share-based compensation expense


801



 

801

Cash dividends, $0.09 per share




(1,215
)
 

(1,215
)
Other comprehensive loss





 
(948
)
(948
)
Reclassification adjustment to net income





 
249

249

Balance, September 30, 2019
$
95

$
44

$
54,143

$
(5,960
)
$
24,955

 
$
(18,522
)
$
54,755


See notes to unaudited condensed consolidated financial statements.























6







HAMILTON BEACH BRANDS HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
 
Class A common stock
Class B common stock
Capital in excess of par value
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders' equity
 
(In thousands)
Balance, January 1, 2018
$
88

$
48

$
47,773

$
12,603

 
$
(14,104
)
$
46,408

Net loss



(418
)
 

(418
)
Issuance of common stock, net of conversions
4

(3
)
323


 

324

Share-based compensation expense


955


 

955

Cash dividends, $0.085 per share



(1,162
)
 

(1,162
)
Reclassification due to adoption of ASU 2018-02



1,168

 
(1,168
)

Other comprehensive income




 
1,206

1,206

Reclassification adjustment to net loss




 
324

324

Balance, March 31, 2018
$
92

$
45

$
49,051

$
12,191

 
$
(13,742
)
$
47,637

Net loss



(874
)
 

(874
)
Issuance of common stock, net of conversions


198


 

198

Share-based compensation expense


1,472


 

1,472

Cash dividends, $0.085 per share



(1,165
)
 

(1,165
)
Other comprehensive loss




 
(1,441
)
(1,441
)
Reclassification adjustment to net loss




 
183

183

Balance, June 30, 2018
$
92

$
45

$
50,721

$
10,152

 
$
(15,000
)
$
46,010

Net income



8,044

 

8,044

Issuance of common stock, net of conversions


246


 

246

Share-based compensation expense


399


 

399

Cash dividends, $0.085 per share



(1,165
)
 

(1,165
)
Other comprehensive income




 
903

903

Reclassification adjustment to net income




 
13

13

Balance, September 30, 2018
$
92

$
45

$
51,366

$
17,031

 
$
(14,084
)
$
54,450


See notes to unaudited condensed consolidated financial statements.


7


HAMILTON BEACH BRANDS HOLDING COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(Tabular amounts in thousands, except as noted and per share amounts)

NOTE 1—Basis of Presentation

The unaudited interim condensed consolidated financial statements of Hamilton Beach Brands Holding Company and its subsidiaries ("Hamilton Beach Holding” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

The Company operates through its subsidiaries, Hamilton Beach Brands, Inc. ("HBB") and The Kitchen Collection, LLC ("KC"). HBB is a leading designer, marketer and distributor of branded, small electric household and specialty housewares appliances, as well as commercial products for restaurants, bars and hotels. KC is a national specialty retailer of kitchenware primarily in outlet malls throughout the United States ("U.S."). 

Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the remainder of the year due to the highly seasonal nature of our primary markets. A majority of revenue and operating profit occurs in the second half of the calendar year when sales of our products to retailers and consumers increase significantly for the fall holiday-selling season.

Prior period interest income amounts have been reclassified from other expense (income), net to interest expense, net and prior period non-trade customer receivable amounts have been reclassified from trade receivables, net to prepaid expenses and other current assets to conform to the current period presentation.

The following new accounting policy is reflected in these quarterly financial statements as a result of the share repurchases made during the first nine months of 2019:

Treasury Stock

The Company records the aggregate purchase price of treasury stock at cost and includes treasury stock as a reduction to stockholders' equity.

NOTE 2—Recently Issued Accounting Standards

Accounting Standards Adopted

In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715)," which amends the requirements in U.S. GAAP related to the income statement presentation of the components of net periodic benefit cost for an entity's sponsored defined benefit pension and other post-retirement plans. The Company adopted this guidance on January 1, 2019. The change in presentation of the components of net periodic pension cost was applied retrospectively which resulted in $0.2 million and $0.6 million of net periodic pension income for the three and nine months ended September 30, 2018, respectively, being reclassified from selling, general and administrative expenses to other expense (income), net.

Accounting Standards Not Yet Adopted

The Company is an emerging growth company and has elected not to opt out of the extended transition period for complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public or nonpublic entities, the Company can adopt the new or revised standard at the time nonpublic entities adopt the new or revised standard.


8


In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)," which requires an entity to recognize assets and liabilities for the rights and obligations created by leased assets. For nonpublic entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is planning to adopt ASU 2016-02 for its year ending December 31, 2020 and is currently evaluating to what extent ASU 2016-02 will affect the Company's financial position, results of operations, cash flows and related disclosures.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)," which requires an entity to recognize credit losses as an allowance rather than as a write-down. For nonpublic entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is planning to adopt ASU 2016-03 for its year ending December 31, 2021 and is currently evaluating to what extent ASU 2016-13 will affect the Company's financial position, results of operations, cash flows and related disclosures.

NOTE 3—Transfer of Financial Assets
The Company has entered into an arrangement with a financial institution to sell certain U.S. trade receivables on a non-recourse basis. The Company utilizes this arrangement as an integral part of financing working capital.  Under the terms of the agreement, the Company receives cash proceeds and retains no rights or interest and has no obligations with respect to the sold receivables.  These transactions are accounted for as sold receivables which result in a reduction in trade receivables because the agreement transfers effective control over and risk related to the receivables to the buyer. Under this arrangement, the Company derecognized $36.9 million and $104.8 million of trade receivables during the three and nine months ending September 30, 2019, respectively, $37.0 million and $107.2 million of trade receivables during the three and nine months ending September 30, 2018, respectively, and $165.4 million during the year ending December 31, 2018. The loss incurred on sold receivables in the consolidated results of operations for the three and nine months ended September 30, 2019 and 2018 was not material. The Company does not carry any servicing assets or liabilities. Cash proceeds from this arrangement are reflected as operating activities in the Condensed Consolidated Statements of Cash Flows.

NOTE 4—Inventory

Inventory is summarized as follows:
 
SEPTEMBER 30
2019
 
DECEMBER 31
2018
 
SEPTEMBER 30
2018
HBB
$
161,043

 
$
122,697

 
$
155,744

KC
20,804

 
21,994

 
28,087

 Total inventory
$
181,847

 
$
144,691

 
$
183,831



9


NOTE 5—Fair Value Disclosure

The following table presents the Company's assets and liabilities accounted for at fair value on a recurring basis:
Description
 
Balance Sheet Location
 
SEPTEMBER 30
2019
 
DECEMBER 31
2018
 
SEPTEMBER 30
2018
Assets:
 
 
 

 
 
 
 
Interest rate swap agreements
 
 
 

 

 
 
Current
 
Prepaid expenses and other current assets
 
$

 
$
349

 
$
440

Long-term
 
Other non-current assets
 

 
710

 
1,268

Foreign currency exchange contracts
 
 
 

 

 
 
Current
 
Prepaid expenses and other current assets
 

 
231

 
29

 
 
 
 
$

 
$
1,290

 
$
1,737

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
 
 
 
 
 
 
 
Current
 
Other current liabilities
 
$
4

 
$

 
$

Long-term
 
Other long-term liabilities
 
244

 

 

Foreign currency exchange contracts
 
 
 

 

 
 
Current
 
Other current liabilities
 
78

 
87

 
310

 
 
 
 
$
326

 
$
87

 
$
310


The Company measures its derivatives at fair value using significant observable inputs, which is Level 2 as defined in the fair value hierarchy. The Company uses a present value technique that incorporates the LIBOR swap curve, foreign currency spot rates and foreign currency forward rates to value its derivatives, including its interest rate swap agreements and foreign currency exchange contracts, and also incorporates the effect of its subsidiary and counterparty credit risk into the valuation.

During the periods ended September 30, 2019, December 31, 2018 and September 30, 2018, there were no transfers into or out of Levels 1, 2 or 3.

Nonrecurring Fair Value Measurements: The Company evaluates long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Certain factors, such as the estimated property, plant and equipment salvage value, used for this nonrecurring fair value measurement are considered a Level 3 input. At September 30, 2019, the Company determined the carrying value of KC’s long-lived assets compared to the estimated undiscounted future cash flows were not recoverable as the Company lowered KC’s outlook for the prospect of a future return to profitability due to the continued decrease in comparable store sales. Based on the estimated selling price of KC’s property, plant and equipment in an orderly transaction between market participants, the Company recorded a $1.0 million impairment charge in selling, general and administrative expenses during the third quarter of 2019.


10


NOTE 6— Stockholders' Equity

Capital Stock: The following table sets forth the Company's authorized capital stock information:
 
SEPTEMBER 30
2019
 
DECEMBER 31
2018
 
SEPTEMBER 30
2018
 
(In thousands)
Preferred stock, par value $0.01 per share
 
 

 

Preferred stock authorized
5,000

 
5,000

 
5,000

Preferred stock outstanding

 

 

 
 
 
 
 
 
Class A Common stock, par value $0.01 per share
 
 
 
 
 
Class A Common stock authorized
70,000

 
70,000

 
70,000

Class A Common issued(1)(2)
9,488

 
9,291

 
9,238

 
 
 
 
 
 
Class B Common stock, par value $0.01 per share, convertible into Class A on a one-for-one basis
 
 
 
 
 
Class B Common stock authorized
30,000

 
30,000

 
30,000

Class B Common issued(1)
4,377

 
4,422

 
4,465

(1) Class B Common converted to Class A Common were 6 and 44 shares during the three and nine months ending September 30, 2019, respectively, and 11 and 343 shares during the three and nine months ending September 30, 2018, respectively.
(2) The Company issued Class A Common shares of 13 and 153 during the three and nine months ending September 30, 2019, respectively, and 9 and 30 during the three and nine months ending September 30, 2018, respectively.

Stock Repurchase Program:  In May 2018, the Company established a stock repurchase program allowing for the purchase of up to $25.0 million of the Company's Class A Common Stock outstanding through December 31, 2019. During the nine months ended September 30, 2019, the Company repurchased 364,893 shares at prevailing market prices for an aggregate purchase price of $6.0 million. There were no share repurchases during the twelve months ended December 31, 2018.

11


Accumulated Other Comprehensive Income (Loss): The following table summarizes changes in accumulated other comprehensive income (loss) by component and related tax effects for periods shown:
 
Foreign Currency
 
Deferred Gain (Loss) on Cash Flow Hedging
 
Pension Plan Adjustment
 
Total
 
 
Balance, January 1, 2019
$
(9,099
)
 
$
1,023

 
$
(9,234
)
 
$
(17,310
)
Other comprehensive income (loss)
362

 
(774
)
 

 
(412
)
Reclassification adjustment to net loss

 
3

 
(49
)
 
(46
)
Tax effects
(17
)
 
207

 
39

 
229

Balance, March 31, 2019
$
(8,754
)
 
$
459

 
$
(9,244
)
 
$
(17,539
)
Other comprehensive income (loss)
360

 
(1,198
)
 

 
(838
)
Reclassification adjustment to net loss

 
202

 
142

 
344

Tax effects
(13
)
 
263

 
(40
)
 
210

Balance, June 30, 2019
$
(8,407
)
 
$
(274
)
 
$
(9,142
)
 
$
(17,823
)
Other comprehensive loss
(852
)
 
(166
)
 

 
(1,018
)
Reclassification adjustment to net income

 
171

 
166

 
337

Tax effects
31

 
(10
)
 
(39
)
 
(18
)
Balance, September 30, 2019
$
(9,228
)
 
$
(279
)
 
$
(9,015
)
 
$
(18,522
)
 
 
 
 
 
 
 
 
Balance, January 1, 2018
$
(7,934
)
 
$
508

 
$
(6,678
)
 
$
(14,104
)
Reclassification due to adoption of ASU 2018-02

 
118

 
(1,286
)
 
(1,168
)
Other comprehensive income
917

 
379

 

 
1,296

Reclassification adjustment to net loss

 
230

 
202

 
432

Tax effects

 
(154
)
 
(44
)
 
(198
)
Balance, March 31, 2018
$
(7,017
)
 
$
1,081

 
$
(7,806
)
 
$
(13,742
)
Other comprehensive income (loss)
(1,999
)
 
624

 

 
(1,375
)
Reclassification adjustment to net loss

 
54

 
188

 
242

Tax effects
94

 
(173
)
 
(46
)
 
(125
)
Balance, June 30, 2018
$
(8,922
)
 
$
1,586

 
$
(7,664
)
 
$
(15,000
)
Other comprehensive income
1,138

 
(425
)
 

 
713

Reclassification adjustment to net income

 
(143
)
 
152

 
9

Tax effects
66

 
165

 
(37
)
 
194

Balance, September 30, 2018
$
(7,718
)
 
$
1,183

 
$
(7,549
)
 
$
(14,084
)

NOTE 7—Revenue

Revenue is recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. A description of the performance obligations for each segment is as follows:

HBB

Product revenue - Product revenue consists of sales of small electric household and specialty housewares appliances to traditional brick and mortar and e-commerce retailers, distributors and directly to the end consumer as well as sales of commercial products for restaurants, bars and hotels. Transactions with these customers generally originate upon the receipt of a purchase order from the customer, which in some cases are governed by master sales agreements, specifying product(s) that the customer desires. Contracts for product revenue generally have an original duration of one year or less, and payment terms are generally standard and based on customer creditworthiness. Revenue from product sales is recognized at the point in time when control transfers to the customer, which is either when product is shipped from the Company's facility, or delivered to customers, depending on the shipping terms. The amount of consideration received and revenue recognized varies with changes in incentives, returns and consideration paid to customers for advertising arrangements.


12


License revenues - From time to time, the Company enters into exclusive and non-exclusive licensing agreements which grant the right to use certain of the Company’s intellectual property (IP) in connection with designing, manufacturing, distributing, advertising, promoting and selling the licensees’ products during the term of the agreement. The IP that is licensed generally consists of trademarks, tradenames, patents, trade dress, and/or logos (the “Licensed IP”). In exchange for granting the right to use the Licensed IP, the Company receives a royalty payment, which is a function of (1) the total net sales of products that use the Licensed IP and (2) the royalty percentage that is stated in the licensing agreement. The Company recognizes revenue at the later of when the subsequent sales occur or satisfying the performance obligation (over time).

KC

Product revenue - KC sells a variety of kitchenware products from a number of highly recognizable name brands to individual consumers. Products are sold through brick and mortar retail stores whereby customers come into KC stores, explore the assortment of merchandise available for sale, select various products that they desire to purchase, bring those products to the sales register and pay the cashier the agreed-upon price using either cash, check or credit card. Once the sale is complete, a receipt is generated and provided to the customer as proof of purchase. Therefore, the sales process is both originated and completed simultaneously at the point of sale. Revenue from product sales is recognized at the point in time when control transfers to the customer, which occurs when the products are scanned at the sales register. The amount of consideration received and revenue recognized varies with changes in returns.

HBB’s warranty program to the consumer consists generally of an assurance-type limited warranty lasting for varying periods of up to ten years for electric appliances, with the majority of products having a warranty of one to three years.  There is no guarantee to the customer as HBB may repair or replace, at its option, those products returned under warranty.  Accordingly, the Company determined that no separate performance obligation exists.

The following table presents the Company's revenue on a disaggregated basis for the three and nine months ending:
 
THREE MONTHS ENDED SEPTEMBER 30
 
2019
 
2018
 
HBB
 
KC
 
Consolidated (1)
 
HBB
 
KC
 
Consolidated (1)
Type of good or service:
 
 
 
 
 
 
 
 
 
 
 
  Products
$
149,876

 
$
20,288

 
$
168,753

 
$
171,346

 
$
25,884

 
$
195.783

  Licensing
1,025

 

 
1,025

 
1,118

 

 
1,118

     Total revenue
$
150,901

 
$
20,288

 
$
169,778

 
$
172,464

 
$
25,884

 
$
196,901

 
 
 
 
 
 
 
 
 
 
 
 
 
NINE MONTHS ENDED SEPTEMBER 30
 
2019
 
2018
 
HBB
 
KC
 
Consolidated (1)
 
HBB
 
KC
 
Consolidated (1)
Type of good or service:
 
 
 
 
 
 
 
 
 
 
 
  Products
$
405,129

 
$
57,824

 
$
460,231

 
$
430,941

 
$
70,746

 
$
498.669

  Licensing
3,351

 

 
3,351

 
2,806

 

 
2,806

     Total revenue
$
408,480

 
$
57,824

 
$
463,582

 
$
433,747

 
$
70,746

 
$
501,475


(1) Includes the required intercompany eliminations between HBB and KC.


13


NOTE 8—Contingencies

Various legal and regulatory proceedings and claims have been or may be asserted against Hamilton Beach Holding relating to the conduct of its businesses, including product liability, patent infringement, asbestos related claims, environmental and other claims. These proceedings and claims are incidental to the ordinary course of business of the Company. Management believes that it has meritorious defenses and will vigorously defend the Company in these actions. Any costs that management estimates will be paid as a result of these claims are accrued when the liability is considered probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss.

These matters are subject to inherent uncertainties and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of an adverse impact on the Company’s financial position, results of operations and cash flows of the period in which the ruling occurs, or in future periods.

HBB is a defendant in a legal proceeding in which the plaintiff alleges that certain HBB products infringe the plaintiff’s patents. On May 3, 2019, the jury returned its verdict finding that the Company had infringed certain patents of the plaintiff and, as a result, awarded the plaintiff damages in the amount of $3.2 million. Accordingly, the Company recorded $3.2 million expense in selling, general and administrative expenses during the second quarter of 2019 for the contingent loss. On September 23, 2019 the Company filed post-trial motions challenging the jury verdict of infringement and the award of damages and the plaintiffs filed motions seeking interest, post-trial accounting, injunctive relief, and attorneys’ fees.  A hearing date on the post-trial motions has not been set.  The Company maintains that its products do not infringe on the plaintiff’s patents and will vigorously defend against the plantiff's post-trial motions.

Environmental matters

HBB is investigating or remediating historical environmental contamination at some current and former sites operated by HBB or by businesses it acquired. Based on the current stage of the investigation or remediation at each known site, HBB estimates the total investigation and remediation costs and the period of assessment and remediation activity required for each site. The estimate of future investigation and remediation costs is primarily based on variables associated with site clean-up, including, but not limited to, physical characteristics of the site, the nature and extent of the contamination and applicable regulatory programs and remediation standards. No assessment can fully characterize all subsurface conditions at a site. There is no assurance that additional assessment and remediation efforts will not result in adjustments to estimated remediation costs or the time frame for remediation at these sites.

HBB's estimates of investigation and remediation costs may change if it discovers contamination at additional sites or additional contamination at known sites, if the effectiveness of its current remediation efforts change, if applicable federal or state regulations change or if HBB's estimate of the time required to remediate the sites changes. HBB's revised estimates may differ materially from original estimates.

At September 30, 2019, December 31, 2018, and September 30, 2018, HBB had accrued undiscounted obligations of $4.5 million, $8.2 million, and $8.6 million respectively, for environmental investigation and remediation activities. The reduction in the amount accrued at September 30, 2019 compared to December 31, 2018 is the result of a reduction to the accrual recorded in the second quarter of 2019 due to a change in the expected type and extent of investigation and remediation activities associated with one of the sites based upon additional testing and assessment performed with respect to that site in the second quarter of 2019. In addition, HBB estimates that it is reasonably possible that it may incur additional expenses in the range of zero to $3.9 million related to the environmental investigation and remediation at these sites.


14


NOTE 9—Business Segments

The Company manages its subsidiaries primarily by reportable segment, which are HBB and KC. The Company includes the required intercompany eliminations between its reportable segments and intercompany revenue based on current market prices of similar third-party transactions. Costs incurred as a stand-alone public entity are allocated to the HBB segment. The only material assets held by Hamilton Beach Brands Holding Company are its investments in consolidated subsidiaries. Substantially all of its cash flows are provided by dividends paid or distributions made by its subsidiaries.
 
THREE MONTHS ENDED
SEPTEMBER 30
 
NINE MONTHS ENDED
SEPTEMBER 30
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
HBB
$
150,901

 
$
172,464

 
$
408,480

 
$
433,747

KC
20,288

 
25,884

 
57,824

 
70,746

Eliminations
(1,411
)
 
(1,447
)
 
(2,722
)
 
(3,018
)
Total
$
169,778

 
$
196,901

 
$
463,582

 
$
501,475

 
 
 
 
 
 
 
 
Operating profit (loss)
 

 
 
 
 

 
 
HBB
$
7,291

 
$
13,238

 
$
11,905

 
$
21,212

KC
(3,143
)
 
(2,407
)
 
(10,063
)
 
(10,545
)
Eliminations
(91
)
 
(36
)
 
(220
)
 
(34
)
Total
$
4,057

 
$
10,795

 
$
1,622

 
$
10,633

 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
HBB
$
972

 
$
1,055

 
$
2,813

 
$
2,991

KC
154

 
258

 
466

 
784

Total
$
1,126

 
$
1,313

 
$
3,279

 
$
3,775

 
 
 
 
 
 
 
 
Capital expenditures
 
 
 
 
 
 
 
HBB
$
1,184

 
$
2,610

 
$
3,156

 
$
6,964

KC
30

 
75

 
149

 
276

Total
$
1,214

 
$
2,685

 
$
3,305

 
$
7,240


NOTE 10—Income Taxes

The Company recognized income tax expense of $2.1 million and $1.2 million on income before taxes of $2.5 million in the three months ended September 30, 2019 and a loss before taxes of $1.1 million for the nine months ended September 30, 2019. Income tax expense includes $1.9 million of deferred tax expense related to a change in judgment regarding the valuation allowance recorded against deferred tax assets of KC.

NOTE 11—Subsequent Events

During the three months ended September 30, 2019, KC continued to experience decreased comparable store sales as a result of declining foot traffic. Further deterioration in foot traffic has lowered the Company's outlook for the prospect of a future return to profitability. As a result, on October 10, 2019, the board of directors of the Company approved the wind down of the retail operations of KC and the closure of all of its 160 stores by the end of 2019. During the fourth quarter, KC expects to incur expenses in the range of $4.0 million to $6.0 million primarily for severance obligations and professional fees. The Company expects KC's total cash expenditures relating to the wind down, excluding cash expenditures in the ordinary course as KC continues to operate, to be in the range of $6.0 million to $8.0 million. These charges and expenses do not include lease termination obligations as the amount is subject to negotiation and is not known at this time. The Company’s estimate of the charges and expenses are preliminary and subject to change until finalized. The Company expects that the historical and future financial results of KC will be classified as discontinued operations in the period during which the assets are abandoned, which is currently anticipated to occur during the quarter ending December 31, 2019.


15


On October 23, 2019, KC and its lender entered into a Forbearance Agreement (the “Forbearance Agreement”) with respect to KC's secured revolving line of credit ("KC Facility"). The wind down of KC's operations constitutes an event of default under the KC Facility. Under the terms of the Forbearance Agreement, the lender has agreed to forebear from exercising its rights and remedies as a result of the events of default pending accelerated payment in full of the obligations under the KC facility on or before December 15, 2019. The Forbearance Agreement reduces the amount of the aggregate commitments to $15.0 million and converts all LIBO rate loans to base rate loans and triggers default interest. In addition, KC will pay a forbearance fee of $12,500 each week until all obligations under the KC Facility are paid in full. The Company has not guaranteed any of the obligations of KC under the KC Facility.

Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except as noted and per share data)

Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in these forward-looking statements are set forth below under the heading “Forward-Looking Statements."
Hamilton Beach Brands Holding Company operates through its subsidiaries, Hamilton Beach Brands, Inc. ("HBB") and The Kitchen Collection, LLC ("KC") (collectively “Hamilton Beach Holding” or the “Company”). HBB is a leading designer, marketer and distributor of branded, small electric household and specialty housewares appliances, as well as commercial products for restaurants, bars and hotels. KC is a national specialty retailer of kitchenware primarily in outlet malls throughout the United States ("U.S.").  On October 15, 2019, the Company announced the wind down of the retail operations of KC and the closure of all of its 160 stores by the end of 2019.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a summary of the Company's critical accounting policies, refer to “Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 as there have been no material changes from those disclosed in our Annual Report.

CONSOLIDATED FINANCIAL SUMMARY
The Company’s business is seasonal and a majority of revenue and operating profit typically occurs in the second half of the year when sales of small electric appliances and kitchenware increase significantly for the fall holiday-selling season.

The consolidated financial summary of the Company includes the required intercompany eliminations between its reportable segments. Costs incurred as a stand-alone public entity are allocated to the HBB segment. Detailed comparisons of revenue and operating profit (loss) are presented in the discussions of the reportable segments, which follow the Hamilton Beach Holding results discussion.


16


Third Quarter of 2019 Compared with Third Quarter of 2018

The consolidated results of operations for Hamilton Beach Holding were as follows for the three months ended September 30:
 
THREE MONTHS ENDED SEPTEMBER 30
 
2019
 
% of Revenue
 
2018
 
% of Revenue
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
169,778

 
100.0
%
 
$
196,901

 
100.0
 %
 
$
(27,123
)
 
(13.8
)%
Cost of sales
129,194

 
76.1
%
 
146,550

 
74.4
 %
 
(17,356
)
 
(11.8
)%
Gross profit
40,584

 
23.9
%
 
50,351

 
25.6
 %
 
(9,767
)
 
(19.4
)%
Selling, general and administrative expenses
36,182

 
21.3
%
 
39,211

 
19.9
 %
 
(3,029
)
 
(7.7
)%
Amortization of intangible assets
345

 
0.2
%
 
345

 
0.2
 %
 

 
 %
Operating profit
4,057

 
2.4
%
 
10,795

 
5.5
 %
 
(6,738
)
 
(62.4
)%
Interest expense, net
864

 
0.5
%
 
1,001

 
0.5
 %
 
(137
)
 
(13.7
)%
Other expense (income), net
688

 
0.4
%
 
(426
)
 
(0.2
)%
 
1,114

 
(261.5
)%
Income before income taxes
2,505

 
1.5
%
 
10,220

 
5.2
 %
 
(7,715
)
 
(75.5
)%
Income tax expense
2,108

 
1.2
%
 
2,176

 
1.1
 %
 
(68
)
 
(3.1
)%
Net income
$
397

 
0.2
%
 
$
8,044

 
4.1
 %
 
$
(7,647
)
 
(95.1
)%
 
 
 
 
 
 
 
 
 
 
 
 
Effective income tax rate
84.2
%
 
 
 
21.3
%
 
 
 
 
 
 

Revenue - Revenue decreased $27.1 million, or 13.8%. HBB's revenue decreased 12.5% primarily due to lower sales volume. KC revenue decreased 21.6% primarily due to the closure of underperforming stores and a decline in comparable store sales.
    
Gross profit - Gross profit decreased $9.8 million, or 19.4%. As a percentage of revenue, gross profit declined from 25.6% to 23.9% primarily due to a decline in HBB's gross profit margin.

Selling, general and administrative expenses - Selling, general and administrative expenses decreased $3.0 million, or 7.7%. KC's selling, general and administrative expenses declined $1.8 million primarily due to the benefits realized from closing unprofitable stores. HBB's selling, general and administrative expenses declined $1.2 million primarily due to lower legal and professional services fees.

Interest expense, net - Interest expense, net decreased $0.1 million primarily due to decreased average borrowings outstanding under HBB's and KC's revolving credit facilities.

Other expense (income), net - Other expense for the third quarter of 2019 includes currency losses of $0.8 million compared with other income in 2018 related to currency gains of $0.2 million.

Income tax expense - During the third quarter of 2019, the Company recognized income tax expense of $2.1 million on income before income taxes of $2.5 million. Income tax expense includes $1.9 million of deferred tax expense related to a change in judgment regarding the valuation allowance recorded against the deferred tax assets of KC.


17


First Nine Months of 2019 Compared with First Nine Months of 2018

The consolidated results of operations for Hamilton Beach Holding were as follows for the nine months ended September 30:
 
NINE MONTHS ENDED SEPTEMBER 30
 
2019
 
% of Revenue
 
2018
 
% of Revenue
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
463,582

 
100.0
 %
 
$
501,475

 
100.0
 %
 
$
(37,893
)
 
(7.6
)%
Cost of sales
352,618

 
76.1
 %
 
372,478

 
74.3
 %
 
(19,860
)
 
(5.3
)%
Gross profit
110,964

 
23.9
 %
 
128,997

 
25.7
 %
 
(18,033
)
 
(14.0
)%
Selling, general and administrative expenses
108,306

 
23.4
 %
 
117,328

 
23.4
 %
 
(9,022
)
 
(7.7
)%
Amortization of intangible assets
1,036

 
0.2
 %
 
1,036

 
0.2
 %
 

 
 %
Operating profit
1,622

 
0.3
 %
 
10,633

 
2.1
 %
 
(9,011
)
 
(84.7
)%
Interest expense, net
2,514

 
0.5
 %
 
2,422

 
0.5
 %
 
92

 
3.8
 %
Other expense (income), net
230

 
 %
 
(253
)
 
(0.1
)%
 
483

 
(190.9
)%
Income (loss) before income taxes
(1,122
)
 
(0.2
)%
 
8,464

 
1.7
 %
 
(9,586
)
 
(113.3
)%
Income tax expense
1,186

 
0.3
 %
 
1,712

 
0.3
 %
 
(526
)
 
(30.7
)%
Net income (loss)
$
(2,308
)
 
(0.5
)%
 
$
6,752

 
1.3
 %
 
$
(9,060
)
 
(134.2
)%
 
 
 
 
 
 
 
 
 
 
 
 
Effective income tax rate
(105.7
)%
 
 
 
20.2
%
 
 
 
 
 
 

Revenue - Revenue decreased $37.9 million, or 7.6%. HBB's revenue declined 5.8% primarily due to lower sales volume and unfavorable foreign currency movements. KC's revenue decreased 18.3% primarily due to the closure of underperforming stores and a decline in comparable store sales.

Gross profit - Gross profit decreased $18.0 million, or 14.0%. As a percentage of revenue, gross profit declined from 25.7% to 23.9% due to a decline in gross profit margin in both the HBB and KC segments.
 
Selling, general and administrative expenses - Selling, general and administrative expenses decreased $9.0 million, or 7.7%. KC's selling, general and administrative expenses declined $7.0 million primarily due to the benefits realized from closing unprofitable stores. HBB's selling, general and administrative expenses decreased $2.0 million.

Interest expense, net - Interest expense, net increased $0.1 million primarily due to HBB and KC higher average interest rates and higher average borrowings outstanding under KC's revolving credit facility, partially offset by decreased average borrowings outstanding under HBB's revolving credit facility.

Other expense (income), net - Other expense for the nine months ended 2019 includes currency losses of $0.4 million compared with other income in 2018 that includes currency losses of $0.1 million. The increase is primarily due to unfavorable foreign currency movements as the Brazilian real and Mexican peso weakened against the U.S. dollar.

Income tax expense - During the nine months ended September 30, 2019, the Company recognized income tax expense of $1.2 million on a loss before income taxes of $1.1 million. Income tax expense includes $1.9 million of deferred tax expense related to a change in judgment regarding the valuation allowance recorded against the deferred tax assets of KC.


18


SEGMENT RESULTS

Hamilton Beach Brands, Inc.

Third Quarter of 2019 Compared with Third Quarter of 2018

The results of operations for HBB were as follows for the three months ended September 30:
 
THREE MONTHS ENDED
SEPTEMBER 30
 
2019
 
% of Revenue
 
2018
 
% of Revenue
Revenue
$
150,901

 
100.0
%
 
$
172,464

 
100.0
%
Cost of sales
119,673

 
79.3
%
 
134,082

 
77.7
%
Gross profit
31,228

 
20.7
%
 
38,382

 
22.3
%
Selling, general and administrative expenses
23,592

 
15.6
%
 
24,799

 
14.4
%
Amortization of intangible assets
345

 
0.2
%
 
345

 
0.2
%
Operating profit
$
7,291

 
4.8
%
 
$
13,238

 
7.7
%
The following table identifies the components of the change in revenue for the third quarter of 2019 compared with the third quarter of 2018:
 
Revenue
2018
$
172,464

Decrease from:
 
Unit volume and product mix
(20,749
)
Foreign currency
(466
)
Average sales price
(348
)
2019
$
150,901


Revenue decreased $21.6 million, or 12.5%. The decrease is primarily due to lower sales volume in the U.S. and international consumer markets. The lower sales volume in the U.S. was primarily due to a significant change in retailer order patterns and lower direct import sales driven by the adverse impact of tariffs. Also contributing to the third-quarter revenue shortfall was a loss of placements in the dollar store channel resulting from HBB's decision to not maintain very low margin business, ongoing foot traffic challenges at some retailers and other pressure points facing individual retail companies. HBB's international consumer markets reported lower sales volume due in large part to a one-time special purchase in 2018 by a customer in Latin America and to a lesser degree to reduced demand in several markets.

HBB's operating profit decreased $6.0 million primarily due to a $7.2 million decrease in gross profit partially offset by a $1.2 million decrease in selling, general and administrative expenses. The decline in gross profit is primarily due to lower sales volume. As a percentage of revenue, HBB gross profit margin declined from 22.3% to 20.7% primarily due to higher inbound freight, transportation and warehousing expenses, and the adverse impact of tariffs.

Selling, general and administrative expenses declined $1.2 million. The decrease was mainly attributable to a $0.9 million decrease in legal and professional services fees primarily due to lower patent litigation expenses and a $0.4 million decrease in employee-related costs primarily due to reduced incentive compensation expense.


19


First Nine Months of 2019 Compared with First Nine Months of 2018

The results of operations for HBB were as follows for the nine months ended September 30:
 
NINE MONTHS ENDED
SEPTEMBER 30
 
2019
 
% of Revenue
 
2018
 
% of Revenue
Revenue
$
408,480

 
100.0
%
 
$
433,747

 
100.0
%
Cost of sales
323,291

 
79.1